Is Changsha Broad Homes Industrial Group (HKG:2163) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Changsha Broad Homes Industrial Group Co., Ltd. (HKG:2163) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Changsha Broad Homes Industrial Group

What Is Changsha Broad Homes Industrial Group's Debt?

As you can see below, Changsha Broad Homes Industrial Group had CN¥3.57b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥378.4m in cash leading to net debt of about CN¥3.19b.

How Strong Is Changsha Broad Homes Industrial Group's Balance Sheet?

The latest balance sheet data shows that Changsha Broad Homes Industrial Group had liabilities of CN¥4.35b due within a year, and liabilities of CN¥1.14b falling due after that. On the other hand, it had cash of CN¥378.4m and CN¥2.57b worth of receivables due within a year. So it has liabilities totalling CN¥2.55b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥855.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Changsha Broad Homes Industrial Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Changsha Broad Homes Industrial Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Changsha Broad Homes Industrial Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Changsha Broad Homes Industrial Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥56m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost CN¥389m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Changsha Broad Homes Industrial Group , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.